Lower food prices help keep CPI low

The Consumer Price Index out late this week is expected
to show inflation rose slightly in the year ended December but
that inflation pressures remain muted.

ASB economist Jane Turner said the index, the official
measure of inflation, was expected to have remained unchanged
in the three months ended December to take annual inflation
to 1.1% from 0.8% in September.

That would also see inflation move back inside the Reserve
Bank's inflation target band of 1% to 3%.

December was a seasonally weak quarter for inflation, largely
due to the seasonal decline in fruit and vegetable prices
heading into summer, she said.

Food items made up 19% of the CPI basket and, as a result,
food prices tended to have a large impact on the
quarter-to-quarter movements in inflation.

Non-tradeable inflation should continue to show signs of
rising, albeit from a low rate. Continued rises in
construction costs, rents and insurance premiums were likely
to remain key drivers, Ms Turner said.

With inflation at the bottom end of the Reserve Bank's target
band, and with the pace of the economic recovery remaining
subdued, there was little urgency to increase the official
cash rate.

ASB economists expected the Reserve Bank to leave the OCR
unchanged at 2.5% until December.

However, there were upside risks to the inflation outlook
which the Reserve Bank would watch carefully, she said. The
key ones were the second-round inflation pressures from the
Canterbury rebuild and the recent increase in housing market
pressures.